Inland Terminals, Logistic Clusters and Global Commodity Chains: Looking Into the Eye of the Storm Jean-Paul Rodrigue Associate Professor, Dept. of Global Studies & Geography, Hofstra University, New York, USA Van Horne Researcher in Transportation and Logistics, University of Calgary, Alberta, Canada TIMEFRAME: 30 minutes I would like to thank the Transport Institute of the Asper School of Business for inviting me to give this presentation. I prefer to use the term “Inland terminal” instead of “inland port” or “dry port”.

Inland Terminals: The Eye of the Storm  Containerized Trade Questioning growth prospects. Paradigm shift (forecasting…). Trade Imbalances Imbalanced flows and shipping rates. Load centers for empties on backhauls to ports. Terminalization Integrating inland terminals, corridors and commodity chains. Governance Including inland terminals within public policy and regional planning. Value capture.   

Global Containerized Trade: Prepare to be Disappointed  Potential Divergence: The First Crisis of Globalization Container yard, Port of Yantian, China

Impact of Recessions on Consumption and Freight Rates Significant Consumption B D A – Basic Goods B – Discretionary Goods C – Durable Goods D – Capital Equipment E – Luxury Goods Decline Severity A E None Low High Value of Goods Source: adapted from D. Jacoby (2008) “How should the global financial crisis affect your freight strategy?”, Logistics Digest, December. http://www.bostonstrategies.com/images/BLD_0812.pdf 1 Trade and Freight Rates Significant 2 3 1 – Futures Indexes 2 – Income and Spending 3 – Container Volumes 4 – Value of Trade Decline 4 None Sequence

Futures Indexes: The Current Trend is Strongly Deflationary… Source: Bloomberg. http://www.bloomberg.com/apps/cbuilder?ticker1=BDIY%3AIND

Annual Light Vehicle Sales, United States, January 2008 – January 2009 (millions) -36.8% Source: http://www.motorintelligence.com -42.3% -22.9%

Port of Los Angeles (Monthly TEUs), 1995-2008: Peaking … and About to Fall Off a Cliff? Traffic peaked in 2006 to 8.5 M TEU, to drop to 8.4 M TEU in 2007 and 7.8 M TEU in 2008.

World Container Traffic, 1980-2008. Reaching Peak Growth? Adoption Acceleration Peak Growth Maturity 2010(?) - 2002-2010(?) 1992-2002 Divergence Source: Drewry Shipping Consultants. 1966-1992

Global Bulk and Container Fleet Partially Immobilized (Singapore, January 2009) According to our sources there are currently 130 ships idle outside Singapore, and satellite pics indicate over 100 ships idle in Piraeus (Greece). This is obviously a temporary strategy while waiting for trade to pick up. The question is what happens next if the trade does not pick up, which is very likely? “The number of containerships laid up is growing very fast. According to French maritime consultant AXS-Alphaliner, 255 ships, equivalent to 675,000 teu in capacity (5.5% of the global containership fleet), were laid up as of January 19 this year. It projects that the volume of containerships on standby will jump to the equivalent of 750,000 teu in early February this year, accounting for 6% of the entire global boxship fleet.” Source: Unknown.

Cars Accumulating at the Long Beach Port Terminal, December 2008 Source: Getty Images

Trade Imbalances: Coping with Distortions  Transport Flows Transport Rates Inland Terminals and Repositioning NS Rutherford Inland Terminal, Pennsylvania

Containerized Cargo Flows along Major Trade Routes, 1995-2007 (in millions of TEUs) Source: UNCTAD, Review of Maritime Transport, various years.

Containerized Cargo Flows along Major Trade Routes, 2007 Million TEUs Growth (2000-2007) 15.4 (+175%) 14.9 4.9 (+48%) Asia 19.9 33.1 USA 10.0 (+178%) 7.6 17.7 (+293%) Imports (M TEUs) 4.5 (+55%) 20.4 Europe 14.5 2.7 (+23%) Exports (M TEUs)

Maritime Freight Rates (Nominal USD per TEU), 1993-2008 Source: UNCTAD, Review of Maritime Transport, Various years.

Geographical Levels of Empty Container Repositioning Hinterland Global Repositioning Inter-Regional Repositioning (inland) Inter-Regional Repositioning (coastal / fluvial) Regional Repositioning Source: adapted from Boile, M., S. Theofanis, A. Baveja and N. Mittal (2008) “Regional repositioning of empty containers: A case for inland depots.” Transportation Research Record: Journal of the Transportation Research Board (in press). Foreland Port Depot / Inland terminal Freight Distribution Cluster Cargo Rotation

Main North American Trade Corridors and Metropolitan Freight Centers Efficient repositioning Cargo rotation Export market

Bulk and Containerized Commodity Chains Bulk Commodity Chain Supplier Customer Port Point-to-Point Consolidation center Complementarity Container port Pendulum Services Inland Terminal Containerized Commodity Chain

Several Established Containerized Commodity Chains in Western Canada Source: Quorum Corporation (2007) Container Use in Western Canada: Inland Terminals, Container Utilization, Service and Regulatory Issues and the Optimization of Use in Western Canada, Government of Canada, Report of the Grain Monitor: Supplemental Program.

Terminalization and Inland Terminals  Economies of Scale: A Hard Pill to Swallow Terminalization and Supply Chains Extended Distribution Centers Trimodal Container Terminal, Willebroek, Belgium

Type and Function of Inland Terminals Load center Corridor Transmodal terminal Satellite terminal Type Function Satellite terminal Close to a port facility. Accommodate additional traffic and serve functions that have become too expensive at the port. Container transloading. Freight distribution cluster / load center Access regional markets (production and consumption). Intermodal, warehousing, and logistics functions. Linked with logistics parks and free trade zones. Intermodal / Transmodal facility Link large systems of freight circulation either through the same mode (e.g. rail-to-rail) or through intermodalism (e.g. rail-to-truck).

The Largest Available Containership, 1970-2007 (in TEUs) E “Emma” Class (2006) S “Sovereign” Class (1997) R “Regina” Class (1996) L “Lica” Class (1981)

Hinterland Logistics: The Realm of the “Last Mile” (or the “First Mile”) Massification Atomization Frequency Capacity GLOBAL HINTERLAND REGIONAL LOCAL Shipping Network Corridor Segment Customer “Last Mile” Inland Terminal Distribution Center Gateway

Massification of Inland Terminals: Automated Transfer Management Systems Source: Mi-Jack Products

Supply Chain Terminalization: Import Flows to the Hinterland Foreland (First Mile) Suppliers Bottleneck Gateway Buffer Distribution center (outbound / inbound) Inland containerized goods flow Inland non-containerized goods flow Offshore Hub Maritime container flow Gateway Port regionalization and the creation of a Regional Load Center Network Inland Terminal Extended Gate (Inland terminals) Extended Distribution Center (Terminal as A warehousing unit) Customers Hinterland (Last Mile)

Container Transloading: Could it Move Inland? Cause Outcome Consolidation Transferring the contents of smaller containers into larger containers (e.g. three maritime 40 foot containers into two 53 foot domestic containers). Cost savings (number of lifts). Time delays. Weight compliance Transferring the contents of heavy containers into loads meeting national or regional road weight limits. Palletizing Placing loose (floor loaded) containerized cargo unto pallets. Adapting to local load units (e.g. europallet). Demurrage Handing back containers to owner (maritime shipping or leasing company) by transferring its contents into another load unit (e.g. domestic container) to avoid charges. Equipment availability Making maritime containers available for exports and domestic containers available for imports. Trade facilitation. Supply chain management Terminal and transloading facility as a buffer. Delay decision to route freight to better fulfill regional demands. Perform some added value activities (packaging, labeling, final assembly, etc.)

Governance and Inland Terminals  Terminal Operators and Value Capture Regional Integration as Logistics Clusters Uiwang Inland Container Depot, South Korea

The Value Capture Process along Commodity Chains Port Authority Maritime Services Inland Services Port Services Horizontal Integration Port Holding Offshore hub Inland Port Port Vertical Integration Maritime shipping has a profit margin of only about 2%. Single operator controls the berth-to-gate operations. Maritime shipping lines moving inland to capture value. Port terminal operations. Rail and trucking operations. Distribution centers. Logistics. Commodity Chain Maritime Shipping Port Terminal Operations Inland Modes and Terminals Distribution Centers

Inland Terminals: Operations and Added Value Core (Operations) Infrastructure Modal access (dock, siding, road), unloading areas Equipment Intermodal lifting equipment, storing equipment Storage Yard for empty and loaded containers Management Administration, maintenance, access (gates), information systems Ancillary (Added Value) Trade facilitation Free trade zone, logistical services Distribution centers Transloading, cross-docking, warehousing, light manufacturing, temperature controlled facilities (cold chain) Storage depot Container depot, bulk storage Container services Washing, preparation, repair, worthiness certification The core is standard and replicable almost everywhere. It is the ancillary that makes the difference because this is where most of the added value can take place.

Functional Integration of Freight Clusters Scope Logistic Pole FTZ Logistic Cluster The level of functional integration between the distribution activities located within a cluster varies from small where they simply share a location and its accessibility to significant where activities have a high level of integration. Thus, three major levels of functional integration can be found for freight distribution clusters: Logistic zones. The suburbanization of distribution centers (DC) resulted in the formation of various logistics zones where land is available and with proximity to major road infrastructure. However, those activities are commonly unrelated, implying that they have their own supply chains and distribution networks. Accessibility tends to be the main factor favoring agglomeration within the freight cluster. They are likely to appear rather spontaneously as several firms realize the advantage of a location for freight distribution centers. Logistic clusters. A concentration of freight related activities within a specific area, commonly built for such a purpose, master planned and managed. These activities include distribution centers, warehouses and storage areas, transport terminals, offices and other facilities supporting those activities, such as public utilities, parking space and even hotels and restaurants. Although a logistic cluster can be serviced by a single mode, intermodal facilities can offer direct access to global and regional markets. The development of logistic clusters has many benefits to manage the freight flows generated by several unrelated users through economies of scale since they are sharing the same facilities and equipment, mostly around a transport terminal or a depot. This in turn reduces transport costs and promotes its reliability. Various names have been used to label them, such as "freight villages". Logistic poles. Has all the characteristic of a logistic cluster, but commonly implies a higher level of integration between the firms and distribution centers present within the pole as well as with transport terminals servicing the pole. This can also involve the setting of a free trade zone (FTZ) within the pole, conferring an additional level of flexibility (and complexity) in freight distribution. In some cases of advanced supply chain management strategies, the terminal upstream of the supply chain can act as a storage buffer and functionally be part of the logistic pole. Logistic poles tend to be the outcome of a concerted action between government agencies and the private sector. Freight distribution clusters can grow both in scale and scope. Although they can independently grow either in scale or scope, this process tends to be concomitant. Logistic Zone Distribution center Terminal / Depot Port Scale

Free Trade Zones: Setting The Rules Infrastructures High level of infrastructure, such as land, transport, office space, utilities, logistics services, business services and other facilities. Regulations Streamlined to improve efficiency, including custom services, labor regulation and permits. Location High accessibility location, often close to major terminal facilities such as a port, inland terminal or an airport. Location often away from conventional industry. Export-oriented Activities operating within the zone produce mainly or exclusively for foreign markets. Incentives Variety of incentives, including low cost land, infrastructures, tax and duty exemptions or various subsidies. Source: adapted from Kusago, T and Tzannatos, Z. (1998) “Export processing zones: A review in need of an update”, SP Discussion Paper No. 9802. The World Bank.

Free Trade Zones: “Bending the Rules” Custom Clearance Done inland instead of at the gateway port. Likely faster. Receiver gets further advance notice. Duties Not paid until the consignment is released and moved out of the FTZ. If transformation is performed in the FTZ, the duty class may change. Select the taxation regime. Settlement If combined with Warehousing. Vendors often not paid until the freight leaves the terminal for delivery.

Inland Terminals: The Calm after the Storm (lessons to be learned)  Rebalancing of the global economy Repositioning strategies Terminalization (intermodal integration) Logistics cluster (regional integration)   While the current context is prone to uncertainties, it can be anticipated that once the malinvestments caused by the housing bubble and its contamination of the global economy have been cleared by a deep recession, a new period of growth will result. The storm will abate, leading to a calmer period where future trends are easier to assess. The following interelated points can provide a guideline: 1) The global economy will be rebalanced under different fundamentals that are likely to be linked with lower growth rates. Still, large continental markets like North America will rely on a network of inland terminals as a fundamental structure to support and organized hinterland freight movements, as import and export-based activities. It is to be kept in mind that while energy prices have collapsed because of demand destruction, they are likely to surge again once the recession runs its course. Once this takes place, inland terminals will be even more important in maintaining efficient commodity chains. 2) It can be expected that resources will play a greater role within containerized trade with inland terminals. This implies a set of repositioning strategies where inland terminals play a fundamental role either to improve the efficiency of this repositioning, provide better cargo rotation opportunities, or act as an agent that can help promote containerized exports. 3) Inland terminals will take part of the ongoing intermodal integration between ports and their hinterland and through long distance rail corridors. They are likely to be more important elements within supply chains, particularly through their role of buffer. 4) Inland terminals will achieve a higher level of integration within regional freight distribution activities, both from an import and export based perspectives. They will be part of a freight cluster. Governance and PPP are means to insure that the terminal fits within regional policies. 